It's beginning to look a lot like 2007
Consumer debt and consumer savings usually have an inverse relationship, while consumer debt and debt defaults have a parallel relationship. With that in mind, consider this news.
Not since the beginning of 2008 have Americans saved so little — and that’s before accounting for inflation. It could be a sign of trouble ahead.
...By contrast, average real disposable income — income earned from work and asset ownership minus taxes plus transfers from government and businesses — has grown less than 1 per cent since the start of 2016. That’s the worst performance since the recovery began that can’t be explained by tax hikes
Americans have made up the difference between mediocre spending growth and abysmal income growth by sharply reducing how much they save. The current gap between growth in consumption and disposable income is among the widest since the data begin.
Today’s situation is one where consumption would have slowed into recessionary territory if not for the collapse in the savings rate. The one parallel is 2004-2007.
There is another debt record being set by American consumers right now - credit card debt.
Credit-card debt in the US rose in June, surpassing the peak set just before the 2008 financial crisis.
Outstanding revolving credit, which includes credit-card debt, rose to $1.02 trillion in June, according to a monthly report from the Federal Reserve released Monday.
But defaults are rising again for credit cards and auto loans. The New York Federal Reserve observed a 7.5% rise in the share of credit-card balances that were seriously delinquent, or at least 90 days past due, in the first quarter.
"We simply can't keep taking on credit card debt forever without it causing major problems," said Matt Schulz, the senior analyst at CreditCards.com. "This record probably won't be a major tipping point, but it likely isn't too far off."
"It's worrisome that we are starting to see delinquency rates now begin to rise even with the unemployment rate at a cycle low," David Rosenberg, the chief economist at Gluskin Sheff, said in a note on Tuesday.
And finally there is the mountainous, total amount of consumer debt that must be considered.
Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance.
To be fair, a lot of consumer numbers don't look so bad historically.
But then history might not be the best measurement to how precarious the consumer's finances are.
About 46 percent of Americans surveyed by the Federal Reserve could not pay a hypothetical $400 emergency expense, or would have to borrow to do so, according to a 2016 report.
In 2007-2010 these was collateral for much of the debt - houses. However, this time, when the credit cycle ends, there will be few houses to seize, and thus, the debt will have to be written off.
Credit cycle: During an expansion of credit, asset prices are bid up by those with access to leveraged capital. This asset price inflation can then cause an unsustainable speculative price "bubble" to develop. The upswing in new money creation also increases the money supply for real goods and services, thereby stimulating economic activity and fostering growth in national income and employment.
When buyers' funds are exhausted, an asset price decline can occur in the markets which had benefited from the credit expansion. This can then cause insolvency, bankruptcy, and foreclosure for those borrowers who came late to that market. This, in turn, can threaten the solvency and profitability of the banking system itself, resulting in a general contraction of credit as lenders attempt to protect themselves from losses.